"I am appalled about the poor oversight of group self-insurers and their operations in Kentucky," said Gov. Ernie Fletcher, in a statement.

The governor said, "We have new management, which has done an initial assessment and recommended transferring these funds to the Office of Insurance, which has more expertise to oversee them and more regulatory options. This increased regulatory oversight will provide more stability to the financial integrity of the workers' comp fund and provide stronger protection for Kentucky workers."

The move affects the Associated Industries of Kentucky selective self-insurance fund (AIK Comp Fund), which is one of eight self-insurance workers' comp funds in the state, said Mark York, deputy secretary for Environmental & Public Protection Cabinet. All eight funds have been moved under the oversight of the Office of Insurance, which is a part of the cabinet.

The governor's action, he said, was taken after an audit of AIK Comp Fund found a $40 million reserve deficit for 2002 and a projected reserve deficit of $53 million through 2003. The fund covers between 2,000 and 2,300 businesses of various sizes, whose members are responsible for covering any shortfalls.

Ronda Sloan, communications director for the Insurance Office, said the current thinking is that members will be assessed on a pro-rated basis related to amount of premium paid.

The governor's transfer allows the Office of Insurance to increase regulatory review and examination, and initiate rehabilitation of the programs. The governor made the move to ensure all claims to the fund are covered and paid, he added, noting that no claims have gone unpaid.

No deficits were reported at the other seven funds, Mr. York said.

The Property Casualty Insurers Association of America welcomed the move by Gov. Fletcher.

"We applaud the governor for his quick action in moving to resolve the current crisis with the AIK Comp Fund and to further stabilize the market," said Greg LaCost, PCI regional manager and counsel for the Des Plaines, Ill.-based carrier association.

Mr. LaCost said Gov. Fletcher's decision "supports our argument that the group self-insured workers' compensation funds should fall under the same regulatory oversight that private insurers face as they compete for business in Kentucky."

"While the state has its hands full in attempting to approve a plan that will fairly divide the current deficit among AIK Comp policyholders, today's action was critical in that it will ultimately produce a more accountable workers' compensation system in Kentucky," he added.

Mr. LaCost said mandating the same accounting and regulatory scrutiny as that of private workers' comp insurers, and ensuring that the group self-insured funds have adequate reserves, will guarantee payment of claims and avoid future surprises and assessments for policyholders.